The Luxury Market Fallacy

February 1st 2015

The Real Deal

By C.J. Hughes

In the world of New York City real estate, the market for über-luxury apartments can seem like the only game in town.

But despite the buzz about big-ticket sales, deals above the $5 million and $10 million mark are not as big a slice of the overall market as some might think, according to an analysis by The Real Deal of closed deals on the website StreetEasy.

The numbers show that only about 1 percent of all Manhattan co-op and condo sales — or about 370 out of 30,900 sales between January 2013 and January 2015 — fetched $10 million or more. (Figures from the appraisal firm Miller Samuel show about 5,000 fewer overall sales — StreetEasy’s stats tend to include more non-linear deals like co-op transfers and some land deals — but the same basic proportions hold true.)

Meanwhile, only about 1,300 sales, or 4 percent of all sales, went for $5 million or more during that same time.

Even sales priced at $3 million and up — the “luxury” benchmark used by several market reports — accounted for only 3,230 deals, or just over 10 percent of all transactions.

Market analysts say that while the luxury market is a growing percent of the overall market, its small size makes it a poor gauge of the market’s health.

Analysts also say the obsession with colossally large deals obscures what’s going on with the vast majority of the market, including in the lower-end luxury sweet spot between $1.5 million and $3.5 million.

Jonathan Miller, president of Miller Samuel, pointed to some troubling signs in the market that are not getting much attention — like a drop-off in sales activity at the year’s end, and a shortage of inventory in the resale market.

For example, while the number of deals is up in the $10 million-plus world, overall sales activity in the fourth quarter plummeted 18 percent year-over-year, according to Douglas Elliman’s marketing report, which is prepared by Miller.

“One percent of the market is getting 99 percent of the eyeballs,” he said. “We’re zeroing in on the wrong things, things that are shiny and sparkle.”

Of course, it’s easy to get taken with the luxury deals: Despite the fact that they don’t account for much of the activity in the market, they do account for a large (and growing) chunk of the dollar volume.

While the dollar value of closed deals priced in the $5 million-and-above category hasn’t budged much in the last year in Manhattan — creeping to $1.42 billion in 2014’s fourth quarter from $1.4 billion at the end of 2013 — the dollar value of closed deals priced at $10 million-and-up jumped by about 65 percent. There were 40 of those sales valued at $931 million in 2014’s fourth quarter, up from 36 sales valued at $506 million at the same time the year before.

Historical data, not surprisingly, shows that luxury property sales in general are gobbling up more of the overall market share as well.

With the exception of early 2008, the last decade has rarely logged more than 15 or so deals a quarter in excess of $10 million, according to Miller Samuel.

That is, until 2013, when sales of condo units in a crop of pricey new condo towers began closing. Since then, the $10-million-plus sector has grown and even leapt upward so much that in the last year Miller began charting a new category: $30 million and up. There were eight of those monster deals in the fourth quarter, up from one during the same time the year before.

In addition to skewing the overall market statistics, the growth of the high-end market is creating some problems in its own particular niche.

For starters, Fred Peters, president of Warburg Realty, echoed other observers when he noted the city is “moving to a bit of a glut in the ultra-luxury market.”

And that can knock pricing out of whack. “You have a very visible circus sideshow dominating the discussion about the housing market, which has the tendency to influence unsupported optimism,” Miller said.

The flashy deals can cause sellers to overprice their properties, believing that the buyer pool is deeper than it actually is.

Meanwhile, not everything on the high end is selling fast.

Raphael De Niro, a top agent at Douglas Elliman who is marketing a $20 million duplex co-op at 969 Fifth that’s been listed since 2012, said selling hugely expensive apartments still takes time. “No one knows how deep the market is for apartments for more than $10 million,” he said.

Leonard Steinberg, president of Urban Compass, pointed out that it’s only human nature to focus on the sexy deals with mega price tags.

“It’s a societal norm today, to talk about the Kardashians instead of the millions and millions of other people on the planet,” said Steinberg. “Dreams are much more exciting than reality.”